11-7B. (Probability trees) The Buckeye Corporation is evaluating an investment proposal with an expected life of two years. This project will require an initial outlay of $1,300,000. The resultant possible cash flows are as follows:

a. Construct a probability tree representing the possible outcomes.

b. Determine the joint probability of each possible sequence of events taking place.

c. What is the expected IRR of this project~

d. What is the range of possible IRRs for this project?

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Possible Outcomes in Year 1 PROBABILITY Cash flow .6 .3 Outcome 1 $750,000 Outcome 2 $900,000 Conditional Outcomes and Probabilities for Year 2 Outcome 3 $1,500,000 If ACF, = $750,000 ACF Probability If ACF, = $900,000 ACF Probability ACF If ACF, = $1,500,000 Probability $ 300,000 .10 $ 400,000 .2 $ 600,000 .3 700,000 .50 700,000 .5 1,100,000 .40 900,000 .2 900,000 1,100,000 .6 .1 1,300,000 .1